Pensions seem to be in the news constantly, as the UK grapples with a new financial reality heading into the mid-2020’s. The pandemic has unearthed new challenges, but has also exposed some of the cracks that existed prior to the COVID-19 outbreak. According to the Organisation for Economic Cooperation & Development, Brits have suffered the most losses from their workplace pension than almost every other nation in the global west. Between 2001 and 2010, the average annual return a British on pension fund fell by 0.1% every year – in contrast, Chilean savers saw 5% increases whilst Germans enjoyed 3% rises1.
Whilst current pensioners are still doing well according to the numbers, with many of the recommendations suggested by the Pensions Commission having been implemented, there is palpable concern for current workers looking towards retirement in future. Since the turn of the millennium, we’ve seen a decline of defined benefit pensions in the private sector, the end of state earnings-related pensions, low interest rates, falling homeownership, low average contributions to defined contribution arrangements and a collapse in pension saving among the self-employed. Is it time for a major review of the pension system in this country?
Following former chancellor Kwasi Kwarteng’s mini-budget in the autumn of 2022, the Bank of England were forced to step in and buy £65bn in government bonds as the pound plummeted. Although this calmed volatility, the BoE were forced to place a deadline on the buying of bonds in order to prevent a reaction that could further exacerbate the chaos.
Why is this relevant to my pension?
Well, many pension funds in this country are linked to government bonds and the stock market. This will always be subject to fluctuation, but the downward economic spiral of the UK over the past three years, coupled with low interest rates prior to that, have meant that people’s pension pots are diminishing. Several Britons are now facing the possibility of not having enough money to retire with.
Currently the state pension age is 65, with pensioners making up around 13% of the UK population. This is set to rise to somewhere between 66-68 by 2046, with most agreeing that a higher state pension age is a coherent response to the challenges of increased longevity in the workplace. Humans are living longer lives, there is better medical care than there was 40 years ago, so this change makes sense on the surface. However, this is not a one-size-fits-all solution as longevity improvements have not been as transformative as predicted a decade ago.
A pound isn’t going as far as it had gone at the time of the 2007 Act, with two major financial crashes taking a toll on British society as a whole. Most have less disposable income to be able to put into their pension pots, meaning many are working past the retirement age of 65. Of course, some people are happy to work past 66 but others – especially in cases where they aren’t financially prepared for retirement – simply don’t have a choice. Not planning for retirement correctly can be detrimental, especially if you become physically incapable of working
What if I don’t have a pension, what happens?
The life expectancy figure in the UK is years after the current state retirement age of 66 – men are expected to live 19 years longer and women 21 years longer. For this reason, withdrawing from your pension can be very high stakes. Most men are expected to live until 85, but if there is still a good chance that they will live until 90, how do you handle this? Do you live an austere retirement, living in fear of running out of money? Or what if you methodically plan to spend your finances until you’re 85 and live until 90 – where does that money come from for the next five years? Having the freedom to withdraw from your pension pot is liberating, but it’s also an extremely stressful and risky decision every single time.
At the time of the 2007 pension act, self-employment made up 13% of the British workforce. In 2019, self-employment was at an all-time high of 15.3% of the UK workforce whilst post-COVID, it has dropped to around the 2007 level of 13%. This is likely due to business closing down due to financial challenges brought on by the pandemic, so it is expected that the numbers will return to the 2019 level by the end of the current year, highlighting the rise of ‘side-hustles’ and desire for multiple streams of financial income.
Self-employed workers will typically have to handle their own pensions in a way that those working under a company pension scheme do not have to. Although entitled to the state pension, that figure (currently £203.50 per week) is typically not enough to maintain the standard of living that someone has been used to and is usually there to help supplement a private pension. According to the National Employment Trust in 2020, less than 1 in 5 self-employed workers have a pension2 – compared to a whopping 81% of private-sector employees. This could have serious repercussions as the self-employment figures continue to grow over time.
Ultimately, this problem is likely to worsen as the financial crisis carries on. Many politicians have discussed pension reform, but it seems to be low on a long list of priorities as the country faces post-COVID challeneges. It is likely that the government will keep an eye on this, hopefully ensuring we do not face an unprecedented pension crisis in the next 20 to 30 years.
1 UK Pension performance among worst in developed world (June 2023)
2 Understanding pension-saving among the self-employed (March 2023)